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| Sunday, 12 September 2004 |
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| News Business Features Editorial
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Preparing for the budget 2005 and beyond by Lloyd F Yapa The government has invited suggestions for preparing its budget for 2005.The purpose of this article is to assist with the required thinking process. The prevailing circumstances demand, that certain short- term objectives should be set for this exercise. These should include the enabling of individuals/families, especially the poor to earn higher incomes with greater purchasing power preferably by avoiding waste, reducing costs/ unnecessary expenses, producing more outputs from less inputs, value addition, importing less or exporting more at a premium price. Of course, these and the entire budget have to be a part of a long-term plan with goals, strategies and actions. Reducing expenditure The people have to remember, that the primary strategy of realizing these objectives is helping the government to reduce the budget deficit, which stands at about 8% in GDP terms , mainly by refraining from making frivolous demands for wage increases and all kinds of subsidies and incentives, which do not lead to any productivity/production increases. They have to do this for their own sake, as such increases in expenditure by the government will invariably generate inflationary pressures, which will soon nullify any concessions granted in pure money terms. On the other hand, if the deficit is reduced and as a result too much money does not chase after too few goods /services, the purchasing power of the rupee in terms of goods and services will be maintained or even improved. Then the government too will be motivated to make a greater effort to reduce its expenditure mainly on the wage/pensions bill and unproductive subsidies as well as debt servicing and defence. Increasing Revenue Another method of reducing the budget deficit is to increase the revenue earned by the government. The main source of government revenue is the VAT, which has been adjusted to only one band of 15% for ease of administration. However, this rate is too heavy on the poor, while falling rather lightly on the rich. Therefore the imposition of two bands at 10 % and at 20% may be helpful both in reducing prices and curbing conspicuous consumption, especially of imported goods, indulged in by the rich, thereby helping to conserve foreign exchange reserves as well. As regards income taxes, the best course may be to continue with the 32.5% band without any concessionary rates (except for exports and a few specific areas) and use innovative methods to flush out the vast legions of habitual tax evaders with heavy penalties for non payment, avoiding any overall increase in rates, so as not to discourage investment. As regards Customs levies, obviously imported essential food items should be free of duties and other levies in order to reduce their domestic prices. Imported raw materials, intermediate goods and machinery/equipment too should be treated in a similar manner to encourage further processing, especially for export ;however, as much Customs revenue as possible should be collected from imported finished goods, especially the non essential ones. Investment While the budget is being balanced in this manner, investment both to replace wear/tear and to create new assets has to go on apace to generate more jobs and help produce more goods and services ; prices would then begin to take a dip. People in this country, unfortunately, are unaware of the means of unleashing the vast energies of private enterprise to create jobs and increase production in a manner, that the interests of the consumer are protected at the same time. It is high time, they recognize the crass inefficiency of State owned enterprises, especially in Sri Lanka, to carry out this task (mainly due to politicization). All what has to be done to stimulate private investment is to get the State to perform its basic role of administering the country efficiently to ensure social, political and economic stability,( as pointed out in these columns) and removal of all disincentives normally faced by entrepreneurs in this country. The State also has to see, that competition is maintained among private sector businesses and strict regulation is undertaken to prevent them from exploiting the consumers. In addition it may have to channel funds (saved mainly from refusing to feed ' white elephants') for provision of infrastructure facilities and services such as health and education (for supply of required skills), as the private sector may not be inclined to invest in such areas, for various reasons. This is the so called 'miracle' formula adopted by the high performing countries of the world eg those of East Asia. What has happened in this country is forgetting about the basics, of creating peace and stability and resorting to the easy practice of offering generous tax incentives, expecting the private sector to deliver. This practice has failed miserably, besides depressing the revenue earning capacity of governments, (though certain incentives may yet be necessary). Productivity improvement Another area, that should be encouraged by the government budget is productivity impro-vements, (- 'more and better from less'); this means, that while costs are reduced, yields and returns, should be increased (by resorting to increasing the scale of operations, improved materials and technologies ; by differentiation of processes and products through investing in R&D as well as branding, to command premium prices respectively). Above all, better organization and strategic management will invariably deliver in this regard. The best known way of getting people to improve productivity is through recognition and reward of such efforts. The different business schools may have the necessary expertise regarding the institutional means and methods. In fact a productivity improvement culture set in motion with clearly specified objectives and strategies could contribute very significantly to economic growth. A certain amount of funds could be set apart for this activity in the public sector. The government could recognize private sector productivity improvement activities by extending some tax concessions, apart from what is presently available for training, research and marketing. The public could use the process outlined above not only to make suggestions for inclusion in the budget but also to identify their own individual efforts to solve the economic woes faced by the nation. |
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